The Fed raises an interest rate

Hello again,

Yesterday afternoon the Federal Reserve indicated that it was raising the discount rate (an interest rate it manages) by 0.25%.  The discount rate is the rate that the Federal Reserve charges banks who must borrow money to meet reserve requirements at their institutions.  The Fed emphasized that this move was not the first of more interest rate increases.

Analysis: I would expect the stock markets to have a queasy sell-off this morning.  When the Federal Reserve increases the price of money, that is interest rates, the cost of doing business around the globe increases.  Usually stock market investors don’t like this.  This is because most businesses finance a portion of their growth projects with some form of debt.  Consequently, it can be assumed that the Fed feels that businesses are better able to overcome these costs.  So, in contrast to the way the markets are likely to respond, I feel the rate increase is a bullish sign from the Federal Reserve.

Yet, it is also true that the Federal Reserve has pumped billions upon billions of dollars into the U.S. economy.  If unchecked that cash tidal wave will lead to inflation and likely to another asset-bubble.  So the Fed’s move is also an indication that it feels the need to start to move against inflation.  It also is an indication that the Fed is starting to shift its gaze from the economy to inflation.  Again, this, to me, is a bullish sign.

Importance grade: 8; this is the first time in a looooong time that the Federal Reserve has raised interest rates and is likely a sign that the Fed is confident that the U.S. economy is well on its way to recovery.

Jason